Corporate Governance and the Diversification Discount: The Implications of the Sarbanes-Oxley Act
31 Pages Posted: 25 Sep 2011 Last revised: 9 Jan 2012
Date Written: September 19, 2011
Abstract
We examine whether the Sarbanes-Oxley Act has a major role in reducing the diversification discount and enhancing internal capital markets efficiency. The act proposes new rules and regulations on financial practice and reshapes corporate governance to insure alignment of incentives between corporate insiders and investors. We check the relationship between corporate governance variables and the diversification discount. Finally, we conclude the indirect effects of the act in enhancing efficiency and reducing the diversification discount. We find that the level of corporate governance, especially CEO power, affects the efficient allocation of resources and the diversification discount correspondingly. However, we find that the sensitivity of the diversification discount to CEO power decreases significantly after the implementation of the Sarbanes-Oxley Act, which implies that the restrictions and regulations passed by the act enhance corporate governance and limit the misallocation of resources and the diversification discount respectively.
Keywords: Diversification Discount, Internal Capital Market, Corporate Governance, Sarbanes-Oxley
JEL Classification: G34, L25, K22
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Tobin's Q, Corporate Diversification and Firm Performance
By Larry H.p. Lang and René M. Stulz
-
The Cost of Diversity: The Diversification Discount and Inefficient Investment
By Raghuram G. Rajan, Henri Servaes, ...
-
The Cost of Diversity: The Diversification Discount and Inefficient Investment
By Raghuram G. Rajan, Henri Servaes, ...
-
Cash Flow and Investment: Evidence from Internal Capital Markets
-
The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment
-
Internal Capital Markets and the Competition for Corporate Resources
-
Explaining the Diversification Discount
By José Manuel Campa and Simi Kedia
-
Explaining the Diversification Discount
By José Manuel Campa and Simi Kedia